Things are stirring in Malaysia’s banking industry. So far in June, two of the biggest banks in the country have set about merger talks, and another has agreed to sell half of its international brokerage business to a mainland Chinese securities house.
On June 1, RHB Bank and AMMB Holdings, better known as AmBank, announced they were discussing a merger and had received approval from the central bank to move forward. They have signed an exclusivity agreement, which will expire on August 30, and are moving towards an all-share merger.
It’s an easy deal to understand, all about scale. Public Bank, CIMB and Maybank are all stronger; combining two of the banks on the rung below makes for a strong top-four bank.
RHB group managing director Dato’ Khairussaleh Ramli says it will “create a stronger fourth largest banking group, creating scale and market leadership across key business segments”, while Dato’ Sulaiman Mohd Tahir, group CEO of AmBank, speaks of “our goal of becoming a formidable banking group”.
Analyst opinion suggests the deal, which would create an institution with total consolidated assets of RM368 billion ($86 billion) based on March 2017 financials, is sensible but a better outcome for AmBank than RHB.
Moody’s senior credit officer Eugene Tarzimanov says the merger would be credit positive for AmBank “because its distribution, funding resources and systemic importance would benefit from being part of a larger Malaysian banking group”, and on a standalone credit basis AmBank’s funding profile is weaker than that of RHB.
Moody’s senior analyst Simon Chen adds that AmBank has “a materially smaller market share of domestic deposits and lower percentage of low-cost current and savings account deposits in its deposit mix than RHB”.
In combination, the funding profile would be more likely to end up looking like RHB’s, say the analysts.
RHB, on the other hand, would be likely to face operating challenges to rationalize the structure of the merged organization. Moody’s points to RHB’s previous integration of OSK Investment Bank as “suggesting significant challenges, with the realization of revenue and cost synergies occurring many years after integration”.
Besides, it doesn’t propel either institution up the rankings in terms of scale, just makes it a stronger fourth: CIMB and Maybank are still the corporate and investment banking leaders, and Public leads in retail. It could, though, potentially become a leader in asset management, general insurance and stock broking, and second in Islamic banking, according to Nomura.
Nomura analyst Tushar Mohata is reluctant to assume that the deal will go ahead. RHB has form for collapsed deals: it was supposed to merge with CIMB and Malaysia Building Society (MBSB) in 2014, though it is understood that ultimately fell apart because CIMB changed its mind after conducting due diligence.
“The chances of an RHB-AMMB merger happening are definitely higher,” says Mohata, saying the earlier failure was “much more complicated”, but he thinks it is too early to quantify potential cost synergies.
The biggest potential problem is RHB’s shareholders, and one in particular.
The second-largest shareholder in RHB is Aabar Investments PJS. Aabar is a diversified investment company and a subsidiary of Mubadala, one of Abu Dhabi’s sovereign wealth funds. Its mandate is to make a good return for Abu Dhabi, pure and simple, and it is known for tough expectations on price.
Aabar is believed to be another reason the RHB-CIMB-MBSB deal collapsed, and Aabar will certainly have a view on what RHB should be paying for AmBank – in terms of the relative value of the shares.
The other issue is that AmBank is right in the middle of the 1MDB scandal, since the account into which $681 million appeared from either the Saudi Arabian royal family or 1MDB itself, depending on who you listen to, was held at AmBank.
The US Department of Justice actions around 1MDB continue, and to make matters still more complicated elections in Malaysia are coming up.
One party will be watching with particular interest: ANZ, which owns almost 24% of AmBank and would very much like to sell it.
CEO Shayne Elliott told Euromoney last year how stakes such as these – others include 38.9% of Panin Bank in Indonesia and stakes in China, though ANZ has since offloaded 20% of Shanghai Rural Commercial Bank – were surplus to requirements.
“My logic is simple,” he said. “I say: none of our shareholders buy stock in ANZ to get exposure to them and none of our customers give us business because of any benefit they get from the relationship. They don’t have a strategic value. They have a financial value but they are chewing up about $5 billion of our capital.”
Worse, the 1MDB situation was causing ANZ some embarrassment.
“Putting AmBank aside specifically, it is true that you may own 10%, 20%, 30% of an economic interest in something but you’re on the hook for 100% of the reputational risk,” said Elliott.
Consequently, a merger should give Elliott an out he and his shareholders very much want to see, but price, and the attitude of Aabar, will need to be negotiated.
Sale of stake
On June 6, CIMB said it would sell a 50% stake in its international brokerage business to China Galaxy Securities for S$167 million – and that its domestic stockbroking business was on the block for a partial sale too.
CIMB Securities International holds CIMB’s ex-Malaysia stockbroking businesses, which comprise institutional and retail brokerage, equities research and other securities businesses in Indonesia, Singapore, Thailand, Hong Kong, South Korea, India, the UK and the US.
The purchase price works out as 1.3-times the business’s consolidated net asset value of S$256.9 million, as it stood when last stated at December 31, 2015. The deal should be completed by the fourth quarter of 2017.
Tengku Dato’ Zafrul
Tengku Dato’ Zafrul Aziz, the CEO of CIMB Group, said in a statement: “[The deal represents] the embracing of a new paradigm for the stockbroking business. CIMB’s stockbroking business will effectively be repositioned as a pure play broker with the client base of a universal Asean bank.”
He called it a “natural fit” and said the venture would offer the same businesses it does today, “supplemented by the extensive equities distribution platform and research coverage of the joint venture”.
The amount of money is not significant, and CIMB didn’t really need it anyway: the group’s first quarter results, to March 31, 2017, showed a record quarterly net profit of RM1.18 billion, up 43.7% year-on-year on a pre-tax basis. So why do this?
CIMB’s statement on the deal mentions China’s Belt and Road initiative, and says the venture will be well-placed to capitalize on China outbound M&A, China-Asean cross-border investments and infrastructure funding.
China Galaxy explained the merits of the transaction from its point of view in its voluntary announcement on the deal to the Hong Kong stock exchange, submitted on June 6.
The statement said: “[China Galaxy] is committed to build and further strengthen its international presence [and that the partnership] will offer a unique opportunity for the company to establish a more comprehensive platform to better serve its clients in China, southeast Asia and globally.”
This statement, too, mentions One Belt One Road and says the acquisition will complement that initiative “and lay a solid foundation to facilitate the company’s ability to connect China to international markets and vice versa”.
The deal should be seen in the context of Citic Securities’ acquisition of CLSA, the clearest example yet of a Chinese securities institution trying to become an international player through the purchase of an international business.
What does all of this tell us about Malaysian banking? That it seems to be time for a shake-up.
The domestic economy is pretty miserable, and its reputation internationally has been dragged through the mud by 1MDB. Smaller banks see the merits in joining forces to bolster themselves.
CIMB, long the most internationally minded of Malaysian banks and a long-time champion of Asean and other regional initiatives, recognizes the modest potential rewards at home and is quite prepared to seek help and partnership in growing overseas.